Market Commentary: Weak European data drives stock markets lower

Yesterday the stock markets were driven lower by weak economic data from Europe and the U.S. For the former, the GDP data was an undesirable reminder of the still subdued growth in the region as the preliminary data showed a quarterly advance of just 0.2% (versus expectations of 0.4%); what is more, the data was disappointing at multiple levels as growth in Italy, France, Finland and Holland  all fell short of expectations.

In contrast, the German economy advanced by more than expected, highlighting yet again the lack of convergence of the Euro Area’s economies and, by extension, the challenges faced by the ECB. The market first responded by pushing peripheral yields and the Euro currency to lower levels as it appeared to price in the higher probability for additional ECB easing.

However, later in the day the Euro recovered and the bonds of the non-core countries lost ground; for Greece, the push for higher yields was augmented by political concerns.
 
The U.S. statistics that came out yesterday were rather mixed but the market’s response suggests that the weaker data was deemed more important. Industrial production and the capacity utilization rate failed to meet expectations as did the confidence of the home builders (NAHB Housing Market Index), but the inflation data and the weekly unemployment claims were better than foreseen. 

The real estate data due today (housing starts and building permits) will provide an additional insight into the sectors’ developments and its resilience to the growing mortgage rates. Maybe following the changes in the German Bunds or a higher demand for safe-haven assets amid dismal European data, the US government yields continued to slide lower, with the 10 year rate going below 2.5%.
 
The Asian trading session was similarly weak following new worrisome data on the Chinese banking system; that is, according to Bloomberg, the sector reported the largest quarterly increase in bad loans since 2005. As a result, the stock of bad loans reached the highest level since September 2008.

However, the Indian stock market posted a contrasting performance ahead of the election results due today as the polls and early vote counting suggest that opposition Bharatiya Janata Party will win the elections.

The Russian stocks also fought the downside momentum of the international markets even as the Ukrainian leaders acted against the rhetoric of the Russian leaders and took steps to eliminate the separatists groups in its Eastern regions. The Russian market probably found some relief in the slightly better than expected growth data for the first quarter of this year (0.9% versus 0.7% consensus estimates).

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

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